Wednesday, December 31, 2014

RUFO clause expires at midnight

Special Master Daniel Pollack (right) walks into Judge Thomas Griesa’s court in New York earlier this year.

Stronger position on Central Bank reserves makes gov’t concessions less likely

When the country rings in a new year tonight, it won’t just be celebrating the dawn of a new year, but also the end for the now-infamous RUFO clause.

At this time last year, most Argentines likely had no idea what RUFO was, but the acronym for Rights Upon Future Offers blasted into the nation’s consciousness in the second half of the year as part of the long-running battle against debt-holders that led US credit rating agencies to declare the country in default on July 31.

In the run-up to the fateful date, the government invoked a simple reason why it could not sit down with the “vulture funds” that had filed suit against the country for full payment of the country’s defaulted debt: RUFO.

The debt restructuring contract contains the clause that essentially prohibits the government from offering a better deal to those who rejected the 2005 and 2010 restructurings of defaulted debt. At the time of the restructurings it was seen as an insurance offer to prod more bondholders to join the deal.

Now though, the RUFO is expiring and a solution to the country’s debt woes seem as far away as ever with analysts expecting that the situation could remain stagnant until the October presidential elections.

“Nothing is going to change on January 1, nor on January 2. Or the 3rd. Or the 4th,” an Economy Ministry source said.

Expiration of the RUFO clause tonight, could technically allow President Cristina Fernández de Kirchner to improve the offer to holdouts but she has not made any secret that she does not like the idea.

“They said that after the RUFO clause was no longer an issue on January 1 we would run back to talks. But these vultures are losing their feathers,” the president told thousands of supporters shortly before the Christmas holiday. “And you know what? I reckon they’re going to end up looking more like clowns than vultures.”

The rhetoric is part of the long-standing battle with a group of US hedge funds over unpaid debt. US District Judge Thomas Griesa has sided with the “vulture funds,” saying they are owed US$1.3 billion debt plus interest.

Argentina’s position, however, has been adamant: the hedge funds must accept reduced payment.

The funds, in turn, have vehemently rejected the president’s offer of payment under terms of the bond swaps that followed Argentina’s record default in 2002.

FEWER INCENTIVES

Part of the reason why Fernández de Kirchner’s administration may not be in such a rush to come to an agreement is that since July, government intervention in the economy has reversed a sharp weakening of the black-market peso and shored up foreign reserves.

These two things alone could give Argentina enough financial flexibility to make it through until the October 25 vote.

While an attempted dollar bond top-up did not get as much adherence as the government was expecting this month, it underlined Argentina’s willingness to pay a high price to ease a liquidity crunch rather than settle with the funds.

Some believed Fernandez’s unwillingness to negotiate may be posturing ahead of the RUFO clause’s expiry in a bid to force concessions from the holdout investors led by billionaire Paul Singer’s NML Capital and Aurelius Capital Management.

So expectations for a settlement have shifted to after a new Argentine president is installed in December 2015.

“No deal with holdouts under Fernández. Soonest is the next administration,” said Siobhan Morden, head of Latin America strategy at Jefferies. “It would have to be a crisis to motivate (her) and even then I’m not sure she wouldn’t try to find other alternatives to avoid holdout talks.”

NEXT GOVERNMENT’S PROBLEM

Wall Street views the front runners to succeed Fernández de Kirchner — Buenos Aires Governor Daniel Scioli, Buenos Aires City Mayor Mauricio Macri and Renewal Front leader Sergio Massa — as more market-friendly and the holdout investors may be tempted to hunker down and wait for the new administration.

All three aspirants favour an agreement, saying it will revive investment. But they have been cautious about criticizing the president’s strategy coordinating since many voters agree with her view that the funds are out to cripple the Argentine economy in pursuit of huge profits.

Another factor is the US judge at the centre of the courtroom battle and his appointed mediator.

Griesa appears to have few means to force Argentina to obey his orders even after the RUFO clause expires. He has already ruled Argentine in contempt, to little effect.

But he has authorized mediator Daniel Pollack to grant a seat at the negotiation table to other investors who spurned the 2005 and 2010 bond swaps. This could mute Argentina’s argument that it must settle with all holdouts and not one small group.

If Argentina is seen as dodging negotiations, it faces the risk of exchange bondholders demanding the accelerated payment on the principal and interest due on their investments.

Still, bondholders may hesitate in pulling the trigger. An acceleration could leave the country facing claims of up to US$30 billion, almost all its foreign reserves. This would hugely complicate efforts to put its decade-long debt woes to rest.

“It is not clear who is going to blink first,” said Stuart Culverhouse, head of research at Exotix, a frontier markets broker in London. “It therefore probably becomes the next government’s problem.”

Herald staff with Reuters